Sovcomflot, the wholly state owned shipping company, is to be privatized by the sale of 25% less one share on the Moscow stock exchange, the Minister of Economic Development Maxim Oreshkin said at the Sochi investment forum this week. The announcement, decided last month in the government’s privatization plan for 2017, was made in an aside to reporters, and Oreshkin allowed no questions.

After fifteen years of attempts to sell and list Sovcomflot shares on international stock exchanges, the reversion to Moscow is an immediate blow to the government’s plans, and to the management role of Sovcomflot’s chief executive, Sergei Frank (lead image, lower left). In the longer term, Russian shipping insiders believe, it is a potential opportunity for a personal takeover by Kremlin favourite and the dominant oil transportation oligarch, Gennady Timchenko (lower right). According to Moscow newspaper reports, Oreshkin’s ministry has decided to sell another 50% stake in Sovcomflot by the year 2019, retaining for the state just 25% plus one share. Frank himself has been attempting a state-financed management buyout, and the state controlled oil company Surgutneftegas is also a contender. Read more.

The company, whose Soviet-era name means “Modern Commercial Fleet”, has failed to secure western underwriters and approval from stock market regulators in London, New York, and elsewhere, for an open-market listing. Instead, the Russian state treasury is to collect the privatization cash target of Rb24 billion (currently $414 million) from a scheme financed by the Central Bank and state banks, Sberbank and VTB. “This is fake news,” commented a Moscow shipping insider.” Just like last year’s Rosneft share sale.”

Kremlin rules require privatization of state-owned shares to be launched on the Moscow stock exchange (MICEX), in parallel with offshore listings. Frank has said publicly that he has tried negotiating with the London Stock Exchange, the New York Stock Exchange, and the Frankfurt Stock Exchange. Frank’s bids have come to nothing.

Sovcomflot is the only state-owned Russian corporation to have had its internal accounting, corporate governance and management practices examined in forensic detail in the UK High Court. As a result of allegations initiated in 2005 by Frank, the court heard several weeks of witness testimony and examined thousands of Sovcomflot records. The court then ruled against the company on most of its claims. A series of judgements between December 2010 and March 2011 by Justice Andrew Smith was tough on Frank, who was judged to have been “dishonest”, a perjurer in his own testimony, and the procurer of the false testimony of others. Subsequent Sovcomflot appeals have all failed. Last October, the company lost an appeal against paying a penalty of $72 million to Yury Nikitin, one of Frank’s litigation targets and a former vessel charterer to the company. For details, read this.

Sovcomflot operates a fleet of 131 vessels, including 113 oil tankers and 8 gas carriers; it is ranked seventh in the top-30 oil tanker companies on the high seas. Frank, a former federal transport minister, ousted the company’s chief executive Dmitry Skarga in 2004, and has run the company ever since. In the interval, the oil tanker charter rate determining Sovcomflot’s fortunes has collapsed to less than a third of its peak in late 2004.

Frank had initiated the UK litigation against Skarga, Nikitin, and Tagir Izmaylov, chief executive of the second state oil tanker company, Novoship, which was resisting Frank’s takeover. The courts ruled to exonerate and compensate all three.

The shipping company issued its last financial report on November 17; that was for the nine months to September 30, 2016. The time charter equivalent revenues for fleet operations had dropped 9%, compared to 2015, to $865.3 million. Fleet operating expenses were cut by 18% to $247.8 million. Interest on bank loans jumped 16% to $121.6 million. Profit plummeted 27% to $218.1 million – and that didn’t take into account the London-court awarded payment to Nikitin.

Sovcomflot’s debts are also on the rise. At September 30, they totalled $1.9 billion, up 18% on the year before. The company doesn’t disclose its lenders, but they are believed to be Russia’s state banks – principally Sberbank and VTB. One international debt note issue for $800 million, due for repayment this year, was refinanced by a second issue of $750 million last year; it isn’t due for repayment until 2023. The story of Sovcomflot’s refinancing last year was told here.

Frank has arranged a blackout of bad-news Russian press coverage in Moscow and in the London maritime media. He has been promoted at TradeWinds, a Norwegian owned outlet edited by Julian Bray (right); he covered the UK litigation in Frank’s favour.

The 100% state owned company has been considered for privatization for fifteen years. Kremlin decision-making has been influenced by strategic security concerns to preserve the oil tanker fleet against foreign attempts to prevent Russia selling its oil on international markets. Kremlin proponents of privatization have also viewed the share sale as an opportunity to obtain commissions from the Russian oligarchs competing to control the oil flows abroad.

The first plan for an international stock market share sale would have benefitted the state treasury; less so Timchenko and his ally, then-transport minister Frank. This first privatization plan called for a New York Stock Exchange listing and was devised in 2002 by CEO Skarga. At the time Skarga commissioned JP Morgan to prepare a scheme for the sale of a 25% to 45% shareholding; the purpose then was to raise cash unavailable from state banks or the state budget to fund the construction of new ice-class tankers for the Sovcomflot fleet. At the time JP Morgan estimated the sale of a 25% stake of Sovcomflot would fetch around $250 million. To that, the bank proposed adding another $450 million of bank credit to make the investment into new fleet of about $700 million.

The valuation and borrowing estimates were made before Sovcomflot increased its capital size by merging with Novorossiysk Shipping Company (Novoship).

As Frank wrestled with the evidence in the London courts, the value of Sovcomflot was also hit by falling ship charter rates, declining demand for shipment of crude oil, and the collapse of the crude oil price itself. So international shipping experts and institutional analysts of the Russian maritime sector were asked this week to assess the new privatization announcement. How much of the failure to find an international stock exchange to set the value of the company’s capitalization and share price is due, they were asked, to shipping sector uncertainties; how much to Frank’s disgrace in the UK courts; how much to US sanctions; and how much to the preference of the Kremlin for an insider deal instead of genuine privatization?

A dozen institutional analysts, including executives at JP Morgan, Goldman Sachs, and Deutsche Bank, are listed as covering the Russian maritime sector, ports and shipping companies, according to London-listed Global Ports. Not one agreed to answer the Sovcomflot questions. Part of the reason is that they do not know the answers; another part is that it’s not in their business interest to look for an answer.

JP Morgan and Deutsche Bank were arrangers and underwriters of Sovcomflot’s first western market debt note in October 2010; for the story, read this. The mandate for arranging the second, replacement debt note was held by JP Morgan. When that eurobond was being marketed to western banks last July, it was also understood that the Kremlin was prevented by US sanctions to vest Sovcomflot shares in either a sanctioned Russian oil company, like Rosneft or Surgutneftegas, or in a sanctioned individual like Timchenko. If they are to take over Sovcomflot, they must wait for sanctions to be lifted.

The Russian state bank Sberbank has the inside running for this year’s privatization deal, according to Igor Bulantsev (pictured below, left), the Sberbank executive in charge last December. He followed the announcement of the privatization target for Sovcomflot in November from Alexei Ulyukayev, then Economic Development Minister. He (centre) was arrested on November 15 on a charge of corruption in the privatization scheme for Rosneft shares.

At the same time, Finance Minister Anton Siluanov (above, right) announced that the target for the Sovcomflot share sale was Rb24 billion (then $380 million). He didn’t say who would be motivated to pay that.

Denis Vorchik of Uralsib Bank, a leading analyst of the maritime sector, acknowledges that “an IPO in New York would expand the investor base in comparison to a Moscow-only placement, so Russia’s budget could receive more money from the privatisation deal.” He concedes “the current political situation doesn’t bode well for the placement of a state-run company in New York. Of course, the litigation in London doesn’t improve the sentiment of investors towards Sovcomflot, although they are more concerned about the dynamics of tanker freight rates.”

Alexei Bezborodov, the Moscow logistics and transport expert and editor in chief of infranews.ru, says: “Every shipping company has such court situations in their lives, so I think the UK court decisions didn’t influence the share price of Sovcomflot or listing on foreign markets. There are a lot of different factors the markets are reacting to. I think the decision to list Sovcomflot exclusively on the Moscow market was caused by the government’s anti-sanctions policy, so we can say the political priorities are the reason.”

From St. Petersburg a ports and shipping expert commented: “They have been trying this privatization for more than a decade. Before every economic forum they are starting to speak about it again, but I don’t think this process will be finished in the near future. About the listing on the Moscow market, I think it’s connected with the state position on the issue of sanctions and import substitution.”

“Who would buy a minority stake in such a company as Sovcomflot?” asks a leading European banker with two decades of Russian transaction experience. “It’s a blank check for the Sovcomflot management, which admits no fault and no need to deal openly and honestly with the market. It’s the new trend in the Russian market – less transparency, less accountability. This type of privatization is nothing more than cash collection by the state, made desperate by the economic conditions and the sanctions. It’s the Rosneft deal in miniature.”

He added: “A new Gosplan is in formation using the Central Bank and the state banks to run the money from one state account to another. Mr Frank is no longer in the western market, as we understand it. He’s a cog in a state machine we’ve seen before. Only this one is more, how shall we say? unpredictable.”